An extremist, not a fanatic

August 26, 2014

Constraints, real & imagined

Simon's post reminds me of Sidney Webb's reaction to Britain leaving the gold standard in 1931: "nobody told us we could do that."

The 1929-31 Labour government tore itself apart because it thought the gold standard was a binding constraint which demanded fiscal austerity. But in fact, the constraint was imaginary. Abandoning the gold standard had no great ill-effects.

European social democrats are in the same position Webb was. They are seeing binding constraints when in fact there are only illusory ones. In the euro area, a relaxation of the stability and growth pact to permit fiscal expansion would probably have the same benign consequences as Britain's leaving the gold standard. And in the UK, Ed Miliband's claim that "we won’t have the money" after the next election is illiterate drivel; he's imagining a constraint where none really exists.

This question broadens way beyond fiscal policy. Hopi says that "the constraints on the next government will be so tight". But which of these are genuine, and which imaginary?

To some extent, it's a matter of degree. For example, a living wage of £50 an hour is obviously infeasible, but one of (say) £8 isn't. And a top tax rate of 100% is infeasible, but one of (say) 50% might not be. (Note: feasible isn't the same as desirable.)

In another respect, the issue here is the old one of the role of MPs. If you think politicians should enact voter preferences, then you'll regard their demands for (say) immigration controls as a binding constraint. But if you take the Burkean view that politicians should serve interests rather than preferences, you won't.

It's a cliche on the left that we need a debate about something. But here the cliche is true. We should ask which of the many alleged constraints on a future social democratic government are real and which imaginary. Richard Murphy complains that politicians "choose to shackle themselves to the interests of the corporation and so voluntarily curtail their capacity to act." To what extent is he right?

My personal suspicion is that Labour is not constrained much by the fiscal position, nor by the power of the media, but it is tightly constrained in its ability to raise long-term growth. I suspect that some shadow cabinet members believe the exact opposite.

Herein, though, lies a problem and two paradoxes.

The problem - and first paradox - is that a debate about constraints is unlikely because of a constraint imposed by the Overton window and the traditions of politcal discourse. In recent years, politicians have tried - often successfully - to close off debate. Be it Thatcher's claim that "there is no alternative" or Blair's appeals to modernity, some of the most successful political rhetoric of our time has been the pretence that constraints rule out all policy options bar one. To debate whether constraints are real or imaginary requires a break with this managerialist mindset.

Which brings me to the second paradox. We Marxists are somtimes accused of believing in historical determinism. And yet on this point the opposite is the case. It is a Marxist who is inviting you to believe that politicians might have room to manoeuvre whilst it is rightist social democrats who seem to be the determinists who deny that freedom.

I fear constraints are rather like fairies in Peter Pan. If enough people believe in them they are real. If enough don't believe in them, they disappear.

Many of the constraints on a future social democratic government wishing to pursue an expansionary fiscal policy are imaginary. But if enough CEOs, voters, journalists etc. believe them to be real then they really are real. CEOs might lose confidence and put off investment. So too might voters, who switch to a conservative alternative.

Unfortunately in politics and economics we are not all observing the same objective reality. A critical mass of people can create their own reality.

The idea that if every country in the EZ implements loads of fiscal expansion, everything will be a bed of roses is naïve. That fails to solve the periphery’s basic problem, namely that it isn't competitive vis a vis Germany. In fact it makes the problem worse: that would tend to boost inflation in the periphery.

The only way out of this problem that I can see is to abandon the Euro and go back to national currencies. Another possibility – a long shot this – is to organise some sort of quick internal devaluation in periphery countries. I.e. cut wages and prices in those countries by 20% or whatever. But that would be difficult to organise.

But congratulations to Chris for constantly referring to the Overton Window. I agree: the OW governs everything, from conversation in your local pub to the brains of Westminster politicians.

@ Steven - yes, some realities are socially constructed. For example, I suspect hostility to high tax rates is greater now than 50 years ago in part because neoliberalism has created a tax-hostile world.
However, in other cases we can shift from one belief equilibrium to another - as in abandoning the Gold Standard. And in still others, we can simply ignore the beliefs, for example as the 1997-2010 Labour govt largely ignored public antipathy to immigration.

Western economies took a lot of pain before they decided to leave the Gold Standard. And they recovered fairly quickly after they did so. Maybe it takes a lot to get us to break from bad policy, and the results from doing so have to be fairly quick and obvious for us to accept the new regime.

I doubt the pain from the current recession is quite as severe, or the bounce-back from adopting a new policy (like ceasing austerity) would be quite dramatic enough for it to change perceptions.

As for the immigration example, Labour may have ignored the antipathy, but it hasn't gone away and is being exploited by the Tories. You recently linked to a very good article about voters being 'reality invariant' to immigration - which shows just how strong the grip of our socially constructed realities are.

An imaginary constraint that I care about is one that affects immigration and house building. People think 'the country is full' and are hyper-sensitive to new building, as if the country is on the verge of being concreted over. If people realized only about 10% of the country is built on, maybe we could sensibly relax some planning laws and accept higher immigration.

For a self defined realist you are a little naive. Do people like Hopi, Hariet Harperson, or Blair really believe in the confidence fairy?

Or is it not more likely that the trustifarian middle class leaders of the labour party prefer policies more in their class interests? No tax please we are new Labour... with a pathological desire to appease asset holders obsessed with inflation. Constraints or self interested choice?

imho by far the most important imagined - or self-imposed - constraint is the prohibition of outright monetary financing / permanent monetary expansion in Europe. The ECB could buy lots sovereign and other debts judged to be drags on the economy, announce the purchases will not be reversed unless certain things happen (inflation, growth) which I think would simultaneously address the deflation problem and the impaired state of the credit system.

But this possibility is barely even discussed, let alone taken seriously

There's a bizarre preference in this discussion for casual data over people's actual feelings. Thus Steven Clarke defers to Left Outside's dim-witted idea of "social invariance" - the idea that the application of data trumps all other considerations, which is plainly bonkers.

Similarly, we don't actually have to decide whether politicians serve interests or preferences. In real life they do a bit of both.

It ain't all black and white, you know. Politics is the art of the possible. dh